The industry doesn't seem to be hurting from sequels at all as a whole. In many ways it's positively booming because of them. Seems you can't turn a corner in a game shop without running across some title starring Mario, Link, Samus, Ryu or some other horrible overused character... *sighs* Much like the Star Wars prequels, they may be awful, but people will still pay for them.
Not to say that the quality of the games produced isn't overall suffering. That, I'll back 100%. I haven't cared one tick for anything I've seen most of the aforementioned characters on the cover of in years. More innovation would be nice to see, more attention and interest given to some of the smaller studios and indie developers.
It's not a case of sequels being bad, or being pad for the industry, it's the developers (Well, mainly the publishers) who are causing the issues. Go back to, say, just before 2000, and what did we have? Might & Magic 9, Ultima 9 (I think?), Wizardry 8, Final Fantasy was coming up on 7 (Or was at 7, maybe even 8 or 9) and so forth. If a company tried that now, people would be like "WTF?" - See the comments when a game has a third or fourth title coming out for examples of what I mean, often even a second title will bring the comments.
I also think using a series too much can be problematic - Look at Mario and Sonic, for example. Milked to utter death, but they're still being used (And they've even had cross-over titles). Yes, a title like Super Mario Galaxy will come along (But from what I've seen, it's not far removed from '64 or Sunshine), but for the most part it's rehashes and more generic titles. That, to me, is more damaging to the market than Super Mario Galaxy 3 because it blocks off other titles.
Mario is bound to sell, so Mario Kart would 'block' out other silly racers. Mario Party 'blocks' out humorous party games. You get the idea.